How a Business Line of Credit Works

A business credit line is a highly used borrowing tool among businesses. It works as a credit card in many ways. For example, it doesn’t have a fixed duration or established periodic payments; your payments depend on the balance of the credit line. In addition, the interest rate charged is an adjustable interest rate based on macroeconomic indicators.

A business line of credit works making a set amount of money available to the business. When using a credit line, the business takes out money as there is a need to do so.

The business can take as much or as little money as it needs, and whenever it needs it as long as it’s less than the set limit. Another advantage of a business credit line is that the business only pays interest on the money that it has withdrawn.

Businesses can decide to take out money as frequently as it needs as long as there’s enough balance available in the credit line. You can think of a line of credit as a pre-approved source of money waiting to be used when needed.

You can take money out of a business line of credit in one of two ways: you can write a check or you can withdraw cash. The minimum balance to pay every month is calculated by the interest on the balance. You can then pay all of the balance off, a portion of it or only the interest. By paying a portion, you can increase the available credit.

When applying for a business line of credit, you need to keep into account that there are two basic types of credit lines: secured and unsecured credit lines.

If you choose to apply for a secured credit line, your business must have some collateral to back up the line of credit. This back up works as a guarantee on the line of credit. The advantage of a secured credit line is that the business or the business owner credit history is not as critical.

In an unsecured credit line, the business doesn’t need to have any collateral to back up the funds from the business line of credit. In this case, the business or the business owner must have a very strong credit history.

Generally speaking, you’ll get better terms and a higher credit limit when you apply for a secured credit line. This happens because the lender takes a smaller risk when granting you the business line of credit.

If you are starting your business and don’t have much collateral, you can choose to apply for an unsecured credit line. In this type of business credit lines, you should expect slightly higher rates and lower credit limits.